LBO Terms and Definitions

Learn important terminologies used in an LBO model

LBO Terms and Definitions

A leveraged buyout (LBO) is the acquisition of a target company that is funded using a significant amount of debt. An LBO transaction typically occurs when a private equity (PE) firm borrows as much as they can and funds the balance with equity. An LBO model is built to enable investors to properly evaluate the transaction so they can maximize the risk-adjusted internal rate of return (IRR). There are some important LBO terms and definitions which must be clearly understood in order to build a precise model.


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General Transaction Terms

SponsorThe firm which is purchasing the company via a leveraged buyout (the buyer)
TargetThe firm that is being acquired (the seller)
Normalized EBITDAEarnings before interest taxes depreciation and amortization which excludes all non-recurring expenses or revenues
Minimum cash balanceThe minimum amount of cash to show on the balance sheet, funded with a line of credit
Fully diluted shares outstandingThe number of shares outstanding after accounting for all in-the-money options, warrants, and convertible securities
Transaction close dateThe date on which the transaction is expected to be officially completed
Restructuring chargesAny fees related to early debt repayments which are part of a restructuring
Equity issuance feesUnderwriting fees charged by investment banks to issue equity relating to the transaction
Debt issuance feesUnderwriting fees charged by investment banks to issue debt regarding the transaction
Other closing costsMay include due diligence fees, legal fees, accounts fees, etc. related to the deal


Financing and Leverage Terms

Offer priceThe price offered per share by the sponsor
Cash considerationThe portion of the purchase price given to the target in the form of cash
Stock considerationThe portion of the purchase price given to the target in the form of shares of the acquirer’s stock
Line of creditA loan that can be drawn based on required usage up to a maximum amount
Term loanA loan with regularly scheduled principle repayments
Subordinated debtLoans that rank below other types of debt and are not backed by any assets
Loan amortizationPrinciple repayments over the life of a loan
SweepThe use of excess available cash to repay debt
Mandatory repaymentsThe minimum required principle repayments on loans
Discretionary repaymentsVoluntary repayments of principle on loans with excess available cash flow
Sponsor equityThe equity contribution (investment) from the financial sponsor
Payment in kind (PIK)Interest on a loan that accrues (instead of being paid out) and is all payable on maturity with a bullet (single) payment


Purchase Price Allocation and Deal Metrics

Identifiable assetsAn asset that can be assigned a fair value and can include both tangible and intangible assets
Net book value of assetsBook value of assets minus book value of liabilities
Excess purchase priceThe value of the purchase price over and above the net book value of assets (total purchase price minus net book value of assets)
Fair value adjustmentsThe increase or decrease in the net book value of assets to arrive at the fair market value
GoodwillThe excess purchase price over and above the target’s net identifiable assets (after fair value adjustments)
Purchase Price AllocationThe breakdown of the total purchase price between net identifiable assets and goodwill
Intrinsic valueThe estimated value of the business using discounted cash flow analysis
Sensitivity analysisA method of testing how sensitive certain outputs in the model are to changes in certain assumptions


Additional Resource

Want to learn more about LBO? Check out our LBO Model Course, which provides a detailed lesson on how to build an LBO model step by step. Also, see our valuation resources and equities resources.

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